In Asia, a Gulf’s Worth of Oil Awaits Transport

Friday

Jul 23, 2010 at 5:16 AM

The Tengiz field has been operating at half its capacity because Russia hasn’t cooperated with pipeline expansion agreements.

ANDREW E. KRAMER

ATYRAU, Kazakhstan — Even as the petroleum industry continues drilling in the Gulf of Mexico at considerable expense and risk, a single field here in Central Asia stands ready to produce two-thirds as much oil each day as the entire gulf does, with less danger to the environment.

But 30 years after its discovery, this field, known as the Tengiz, is still running at only about half speed. Blame geopolitics, not geology.

The problem with the Tengiz field, whose lead operator is the American company Chevron, is not a matter of extracting the oil. More than 100 working wells have already been successfully drilled into the scrub brush desert of western Kazakhstan, near the Caspian Sea.

The challenge is getting the oil to the market.

The Tengiz field, one of the world’s largest known petroleum reservoirs, is tied to a 935-mile pipeline to the Black Sea that the Russian government has declined for years to expand. That refusal has held even though Chevron is a minority partner in the Russian-led pipeline, the Caspian Pipeline Consortium, or C.P.C., which agreed a dozen years ago to more than double its carrying capacity when demand required.

As a result, instead of the 600,000 barrels a day from the Tengiz field that the planners had envisioned by now, Chevron has been limited to pumping about 420,000 barrels through the C.P.C. pipeline to the Black Sea — the nearest entry point to international sea lanes. And Chevron has held off on further production investment that would raise the daily total to about a million barrels. (By comparison, the Gulf of Mexico’s daily output is about 1.5 million barrels.)

For now, some of the Tengiz oil that cannot be accommodated by the pipeline moves via a costly bucket brigade of ships on the Caspian and overland railway tankers to the Black Sea. The effort has required Chevron to become Kazakhstan’s largest railroad operator.

“If Chevron had our way and everything worked beautifully, we would have C.P.C. expanded five years ago,” said Guy Hollingsworth, managing director for Chevron in Europe and Asia, referring to the pipeline.

But Chevron does not decide. As the pipeline’s controlling partner, Russia has declined to expand it while trying to line up investors and international rights-of-way for a second, separate pipeline that would provide the next leg of the oil’s journey by an overland link between the Black Sea and the Mediterranean.

Besides further controlling the transport of oil in the region, Russia is seeking to bypass shipping through the Bosporus Straits in Turkey, the typical passage out of the Black Sea, which is a potential bottleneck already operating at full capacity for oil tankers. Russian pipeline negotiations have long been led by the former president and now prime minister, Vladimir V. Putin, who has taken a keen personal interest in Eurasian energy politics.

The standoff over the C.P.C. expansion is a reminder that while environmental concerns pose a big risk to oil production in the United States and its waters, global politics can pose their own business risks to the industry.

In the years immediately after the breakup of the Soviet Union, many in the industry hoped the Caspian region could become a second Persian Gulf, lifting the fortunes of companies and countries and helping shift world oil supplies away from the Middle East.

The Caspian basin “has been a success, but it hasn’t lived up to the exaggerated expectations,” Svante E. Cornell, research director for the Central Asia-Caucasus Institute at the School for Advanced International Studies at Johns Hopkins University, said.

“One of the problems has been the Russian government’s unwillingness to expand the flow of oil,” Mr. Cornell said.

Chevron is hardly the only company in the Caspian region plagued with transportation woes. Finding an outlet to world markets is a consuming headache of all the companies working in this foreboding, landlocked oil basin in Central Asia.

The operator of a separate, gigantic Caspian oil field — a group whose partners include Exxon Mobil, Shell, ConocoPhillips, Total and Eni — has yet to negotiate a suitable route for exports. Neither has BP, which is managing a major gas field in this region.

By comparison, Chevron’s troubles are more subtle. The Tengiz field is productive and profitable, but is not yielding nearly as much oil and money as it could be. Chevron executives emphasize, too, that while exports by rail are more expensive, there is value in having a diversified transportation system.

Chevron won the Tengiz contract in 1993, signing a deal with Kazakhstan’s government, whose national oil company has a minority stake in the investor group developing the field. (Besides Chevron, with its 50 percent stake, Exxon Mobil and the Russian oil company Lukoil are also shareholders.)

Despite the state oil company’s involvement, the group is periodically squeezed by the Kazakh government for additional taxes and fines to prop up the national budget — something that became more common during the recession. Just this month, for example, Kazakh authorities announced a new export tax of $2.73 a barrel, which will cost Chevron and its partners $1.6 million a day. The government also said it was conducting an investigation into illegal drilling, which could bring huge fines. The consortium has denied it deviated from the state-approved drilling plan.

Back in the mid-’90s, a plan took shape for an overland pipeline through Russia to the port of Novorossiysk on the eastern shore of the Black Sea. From there it could move by tanker ships, either to other Black Sea countries or, in most cases, through the Bosporus Straits in Turkey, down to the Mediterranean and from there, various ports around the world.

Under a 1998 deal, the Russian government agreed to the pipeline’s being built in two phases. — the first, at a capacity of 650,000 barrels a day. The second phase would more than double it to exceed 1.4 million barrels a day “when shareholder forecasts required the capacity,” according to a C.P.C. fact sheet.

Phase 1 was completed in October 2001. Phase 2, despite pent-up demand by Chevron and its partners, has yet to begin.

On the basis of the 1990s-era pipeline plans, the Chevron group invested hundreds of millions of dollars drilling wells and bringing them online. The even bigger expense, though, was constructing massive multibillion-dollar processing plants to remove the lethally poisonous hydrogen sulfide gas from the petroleum to make it fit for sale on the global market. Six such plants are now up and running.

The last to be built, at a cost of $7.4 billion, is a behemoth of pipes and tanks that, in a recent visit here, shimmered in the desert heat and occasionally issued a hissing burst of flame from one of its towers. The complex separates oil from vast quantities of hydrogen sulfide, then re-injects some of the gas into the earth. It is so huge that at one point during construction, completed two years ago, 18,000 laborers were clambering over the sand, welding and hammering it all together.

Yet even before the plant was finished, Chevron learned that the pipeline expansion, which would enable the company to export the plant’s output — 285,000 barrels of processed oil per day — would not be done in time.

As Russia has sought investors for the second pipeline, analysts say it needs to promise that there will be enough oil running through it to justify the cost of construction. Chevron’s Tengiz oil has thus became one of its negotiating chips.

Chevron has already agreed to use this second pipeline. But determining the route has become a matter of international negotiations.

Russia initially proposed running it from the Bulgarian Black Sea port of Burgas to the Greek city of Alexandroupolis. But after a change in Bulgaria’s government soured relations with Russia, the focus shifted to running a pipeline across Turkey instead — stretching from the Black Sea port of Samsun to the Mediterranean port of Ceyhan. Various oil companies are now in talks about ensuring supplies for that pipeline.

Mikhail V. Barkov, a spokesman for Transneft, Russia’s state pipeline company, said the government never formally linked expansion of the C.P.C. pipeline to a favorable resolution of this second pipeline plan. It was only a factor among several, he said.

In any case, Russian officials now say a final decision on the timing of the C.P.C. pipeline expansion will come in the fall. Ian MacDonald, Chevron’s vice president for transportation in Europe and the Middle East, said contracts for the pipeline expansion work were already being negotiated.

When the pipeline expansion is approved, he said, Chevron will commit to additional work on the Tengiz field to elevate its output close to a million barrels of oil a day.

But meanwhile, Chevron’s Tengiz field is not living up to its potential.

No new wells are being drilled here. And of the 107 prolific wells already in place, nine are simply left idle. Their stubby pipes protrude from the sand, covered in valves and gauges, like the tips of long straws, waiting to suck up the oil underneath.

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